Battery market development will be guided by step-wise innovation

Pike Research's Brittany E. Gibson is confident that emerging cleantech markets for batteries, especially for transportation and stationary applications, will be viable new markets in ten years.

The next big markets for advanced batteries are coming, we just have to be patient for their arrival, says Pike Research.

Solarpraxis AG/Andreas Schlegel

In the wake of the A123 Systems bankruptcy, one might be eager to draw conclusions about the broader battery industry or the viability of lithium-based batteries. The decline of A123 Systems certainly raises challenging questions about the costs and risks associated with advanced battery development and the role that battery start-ups will play in the markets for energy storage.

But the industry is missing some of the more important lessons to come out of 2012, including the need for more realistic expectations about market development and the need for genuine product demand.

The increasingly portable and connected world that we all live in demands energy storage and Pike Research forecasts growing market demand for batteries in a great many industries over the next ten years.

However, there are great discrepancies in the pace at which these industries are emerging and maturing. In fact, in the case of applications such as electric vehicles and grid storage, market demand has not manifested with any great expediency. But it is not from the cleantech sector that the leading battery players are seeing big revenues. These players have been entrenched for years in the high volume applications, such as consumer electronics, and the high-value applications such as military and aerospace.

What these applications have afforded is for battery vendors such as LG Chem, Panasonic, and GS Yuasa to have a base of robust demand, which they have been meeting for years. This in turn has resulted in the ability to continually invest in battery research and development. So over the years these firms have nurtured a strong client base and have positioned themselves to respond to evolving and emerging demands across the industry.

New battery manufacturers must understand the reasons behind why longstanding companies have been able to pursue new technologies and new markets while maintaining fiscal solvency; this is in part the result of realistic expectations for market growth and products that meet existing market demand which affords them patience to build new technologies.

The research that produced the first iterations of lithium-ion batteries that are so prolific today began back in the 1990s, in response to demands from the emerging consumer electronics sector. Some 20 years later these batteries have iteratively evolved in response to new products available in the market.

Over those 20 years, billions of dollars in research have been spent in private- and publically-sponsored labs to introduce step-wise improvements in energy density, charge acceptance, and cycle life.

These investments are important in an industry that is bound by the technical constraints of physical science, and the cost of expertise in this realm. Without future investment on a similar scale the industry will be unable to meet future market demands. The U.S. government alone spent US$1.3 billion between 2009 and 2012, according to the Government Accountability Office.

Contrast this approach with the recent strategy of many battery start-ups, A123 Systems included. These firms leapt at the chance to lead in an emerging industry for cleantech applications, which was the subject of much media, government and market hype. These firms were actually encouraged to do so by programs like the American Recovery and Reinvestment Act (ARRA), which pushed building manufacturing capacity for an industry that couldn’t produce enough demand to fill orders.

The hype around cleantech industries has skewed market expectations. While Pike Research believes that these industries have a viable future in most applications, it is in the future where they will emerge. This is particularly true for electric vehicles and grid storage, two of the hottest applications for batteries in the cleantech space.

The approach of targeting nascent markets was risky, banking on something that had not yet materialized. But this is not to say that demand doesn’t exist for advanced batteries. The strategy going forward must be to target real market demand and prepare for the emerging markets simultaneously.

Pike Research believes this approach is the reason the leading battery vendors will continue to supply the market with lithium-ion batteries for the foreseeable future, and be positioned to capture revenues in cleantech applications as well.

The fiscal strength and technical prowess of the industry’s leading battery vendors is a self-perpetuating cycle; one that continually generates contracts because these firms have perfected some of the most critical issues associated with advanced batteries, including safety and cost. These technical characteristics mean that legacy vendors are preferred providers for high-value and high-risk applications such as aerospace and military applications, where the limits of advanced batteries are regularly challenged.

In addition to the unrealistic expectations that some battery start-ups appear to hold for market development, it appears that some of these same companies lack the wherewithal to withstand market downturns. The global economic climate remains challenging and will in the near-term.

Legacy battery manufacturers like Johnson Controls have the resources to turn to their bread-and-butter revenues from mature market segments such as automotive batteries until macroeconomic growth resumes. That sort of fiscal strength is essential to success in the capital-intense business of advanced battery development.

But these legacy firms do not ignore future market prospects, and in fact they may be the first to move the industry there. Pike Research is confident that emerging cleantech markets for batteries, especially transportation and stationary applications, will be viable new markets in ten years.

Between then and now battery innovation will proceed due to both private and public investments, but guided by step-wise innovation introduced by legacy battery vendors. This innovation will be driven by the need for new products. Between now and the maturation of cleantech applications only real product demand in applications such as automotive batteries, back-up power, aerospace and military applications will generate meaningful revenues. These revenues will sustain the industry and enable R&D to continue.